What is a Sheep
A sheep is an investor who lacks a focused trading strategy and instead trades on emotion and the suggestions of others, including friends, family and financial gurus. Unfortunately, they may place their financial future in the hands of people who may or may not be reliable sources of sound investment advice.
BREAKING DOWN Sheep
Sheep may lack knowledge about investing tactics and principles, or may not invest the time to do the proper research to become educated about how to manage their investments. This leads them to lack confidence in their own ability to make investing decisions, so they feel the need to rely upon the guidance of advice of others.
This type of investor often makes rash investments without first determining whether these decisions are financially viable. The behavior of sheep contrasts with that of bulls and bears, who have focused views about the market.
Like the animal that inspires the term, a sheep of an investor is a follower, relying on a shepherd for guidance. These shepherds can come in the form of financial pundits or the latest trend or market story. Well-intentioned yet perhaps not quite so knowledgeable friends and family members can also serve the role of shepherds for sheep investors.
Sheep Characteristics and Potential for Risk
Sheep-like investors are often the last to get in on a major market move, such as the tech boom of the late '90s, because they base their investments on what is being talked about the most. Many experts believe that sheep-like investors are the most likely to sustain investment losses because they have no clear investment strategy.
Sheep investors are particularly vulnerable to making poor decisions and costly mistakes in a strong bull market atmosphere, as this is when many investors are feeling optimistic and confident. Some may even become overconfident, especially if they get caught up in the excitement of positive momentum, and this may make the sheep more prone to making risky moves. To make matters worse, investing-related services and products may seize on this opportunity, stepping up their “hard sell” efforts to promote investing materials, tools and services. This in turn can cause sheep to invest, and possibly lose, even more money in addition to the amount they have actually invested in stocks and securities themselves.
For those “gurus” seeking to sell advice and financial products, sheep make particularly profitable targets because they tend to be more susceptible to convincing-sounding sales pitches and persuasive tactics.